The Red Cross/Red Crescent humanitarian movement is exploring using the International Finance Facility for Immunisation’s vaccine bond model to fund its disaster relief work and plug gaps in its financing.
The move, along with a second initiative to apply the model in mine-clearing, particularly in Ukraine, comes amid growth in humanitarian innovative finance – NGOs’ term for sourcing private capital through instruments like catastrophe and impact bonds to diversify their traditional grant funding.
Since 2006, IFFIm has raised nearly US$6bn to accelerate funding of vaccination programmes by issuing bonds against its sovereign owners’ capital pledges. Its model, which funds Gavi, the Vaccine Alliance and the Coalition for Epidemic Preparedness Innovations and involves the World Bank as treasury manager, is yet to see any significant replication despite its success and potential applicability to other areas.
Now, though, with aid budgets dwindling and ESG financing and investment continuing to grow, its appeal for the humanitarian sector is evident.
“This is by far the most successful innovative humanitarian finance product – billions of dollars issued and, most importantly, hundreds of millions of lives impacted,” said Simon Meldrum, innovative finance lead at the International Federation of Red Cross and Red Crescent Societies and executive director at the Humanitarian Finance Forum. “It is still very early days, but as a movement we are very interested in it as one of the tools we’re looking at as we think about funding gaps.”
“We're looking at different financial instruments and the IFFIm model is one of them,” added Alexander Wiese, co-founder and global head of finance and risk management at the Mine Action Finance Initiative.
The scale and efficiency of an IFFIm-style programme of benchmark bonds contrasts with the smaller bespoke transactions that have been a staple of humanitarian finance.
“Impact bonds are useful, but they're not scalable and they're never going to be,” said Meldrum.
The International Committee of the Red Cross even opted not to refinance a pioneering humanitarian impact bond at maturity in 2022 that funded rehabilitation centres in sub-Saharan Africa. A case study cited the complexity and expense of the deal, the first in the sector to involve commercial investors like Lombard Odier and Munich Re – though it also suggested that the impact bond structure may not have been appropriate for the project.
Game changer
While obstacles like institutional knowledge and capacity remain, emulating the IFFIm model “could be a major game changer” for the Red Cross/Crescent movement, said Jorgen Bengtsson, author of a report in September on humanitarian finance for the Swedish Red Cross and a former official at the Swedish International Development Cooperation Agency.
Those closest to IFFIm agree. “In my mind, it makes total sense,” said Christopher Egerton-Warburton, managing director at advisory boutique Lion’s Head Global Partners and the architect of IFFIm at Goldman Sachs, as well as a former board director at IFFIm.
He cites the future reconstruction of Gaza and Ukraine as “exceptional items” requiring surge financing akin to the low levels of child vaccination in many countries that gave IFFIm its initial impetus. IFFIm replications in contexts like these could “reactivate the concept” and highlight its relevance.
“A key point in IFFIm was that the donors perceived that if they frontloaded and made a very significant upfront investment, it would reduce the future need for ODA [official development assistance] expenditures. That point is still relevant,” said Ken Lay, IFFIm chairman – though the former World Bank treasurer emphasised that sovereign donors to new initiatives may have to accept less favourable budget accounting treatment than their past contributions to IFFIm.
The UK’s spearheading of an IFFIm shareholder push in 2022 for replication has quietened, though sources note that the Foreign, Commonwealth & Development Office is still a key driver behind mine clearance financing.
Having funded a report on “innovative finance for mine action” in 2021, the ministry said in a white paper in November that it is trialling a development impact bond in this area in Cambodia with NGOs Apopo and Cordaid.
Increasing activity
IFFIm replication efforts come against a background of increasing activity in humanitarian finance as aid budgets dwindle.
A landmark transaction in September saw the IFRC – one of two central Red Cross/Crescent bodies, along with ICRC – pioneer indemnity reinsurance, which increases its Disaster Response Emergency Fund’s capacity by donors funding premiums and passing risk to the private sector.
Other initiatives under way include a diabetes prevention impact bond; a mangrove-resilience project using parametric insurance and carbon credits; and Pacific cyclone insurance.
Sovereign debt swaps could also form part of the new push. ICRC made a case for “debt conversion for humanitarian and climate impact” in a report in June.
Bengtsson’s report also highlighted potential in “the hitherto little explored opportunity to bundle humanitarian aid-related actions and activities in SDG finance mechanisms and vehicles”.
A key factor in these efforts is the Humanitarian Innovative Finance Hub, which was established last year. Its mission is “to support the movement in its whole to work with innovative finance as we amplify how we finance in addition to grants”, said director Anne-Sofie Munk.
Insurance and blended finance are two key focus points, she said. So too is building partnerships within the movement and its 192 national societies, as well as external parties.
The hub has taken over the Danish Red Cross's landmark volcano cat bond – the world’s first to cover pure eruption risk – which matures this month. It is exploring refinancing the parametric instrument, but only in an enhanced form and perhaps via a different structure if a more effective one has emerged since its launch in 2021.
“We didn't want to just roll over doing the same thing. It shouldn’t be status quo,” said Jeremy Tan, an innovative finance specialist at HFI Hub, who said it is already in talks with reinsurers over the follow-up.
The exercise also inspired a new facility in development to cover typhoon risk in South-East Asia.
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